The Mortgage Guy Blog

It’s both good and bad news. Good because maybe, just maybe the Fed has come to realize just how serious our situation has become. Bad because, well things are very bad. At least we know the dilemma is on their radar.

Yesterday, the Dow sold off to the tune of 298 points in response to the Fed’s quarter point cut in the Fed Funds rate. Then to today they attempted to address our malfunctioning debt markets. The Dow shot up a couple of hundred points initially on the news but gave all but 41 points back by it’s close.

From Marketwatch…

Ahead of Wall Street’s open, the Federal Reserve announced plans to ease elevated pressures in credit markets, saying it would inject cash into the markets through auction of short-term funds.

The Fed also announced foreign exchange swap lines with the European Central Bank and the Swiss National Bank. The Bank of Canada is also a partner in the liquidity plan. The first auction will be held Monday, Dec. 17.

The Fed’s action is significant because they haven’t deployed a strategy like this since 9/11/2001, as the International Herald Tribune points out.

It was the first time since the Sept. 11, 2001, terrorist attacks in New York and on the Pentagon that these central banks have coordinated their support of financial markets.

That’s right, the mortgage and credit crisis has reached 9/11 stature. It’s about time the Fed and central banks around the world wake up to the economic crisis that we are faced with. The first step in solving a problem is recognizing and understanding it. Perhaps they have taken the first step.

“This is not about particular financial institutions with particular problems,” a senior Fed official said in a background briefing for reporters. “It is about market functioning.”

Nor is it just about economic cycles as I pointed out yesterday. But there is doubt the plan is grand enough to work.

Economists and market specialists welcomed the Fed’s intervention but expressed some skepticism whether it would be enough to allay the biggest problems in the credit markets related to the sharp drop in the value of U.S. mortgage securities.

I agree, I doubt it’s enough to cure the disease. Especially when it’s rumored that Citigroup alone is holding 100 billion in SIV’s or structured investment vehicles. That’s just one player. So you can see 10 billion here and 20 billion there are mere bandaids on an open chest wound.

One thing we do know. The mainstream media, the politicians, the CEO’s and of course the central bankers haven’t shot straight with the public. Nor are they now. If they say it’s this bad, assume it’s ten times worse. The information is out there, but you need to dig for it.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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In an effort to avoid a recession in 2008, the Federal Reserve cut the Federal Funds Rate by .25% today. The rate reduction was quickly rejected by Wall Street as evidenced by today’s 298 point fall. The stock market apparently was hoping for a .50% cut.

In my opinion, it’s much ado about nothing. Further it shows that the stock market and the Fed just don’t get it. This problem is much more than addressing an economic cycle.

Without a properly functioning debt securities market, there is no way to avoid a recession or grow the economy, which could very well lead us to a depression.

We have a severely broken debt market that may lead to the failure of our banking system. This is a far bigger issue than economic cycles. Jim over at the Depression of 2006 blog notes…

What is really happening at the Bernanke and Paulson level? The banking system could collapse. Unless they can keep the homeowner making payments the game is over. In order to keep the banks from dropping dead, the really bad stuff cannot be allowed to be marked to market.

With regard to our banking system, therein lies the issue. We don’t know how much bad paper they are hiding. A bomb could be dropped any day now. This can also be an explanation for why the banks are reluctant to lend to each other. They know the game and they know it’s possible they won’t be repaid.

We can weather economic cycles when equipped with a healthy, or at the very least functioning, banking system and debt market. Without them, I’m not so sure.

Besides fanniemae, freddiemac and the FHA, there isn’t much happening in the mortgage market and we’ve all heard the bad news on fannie and freddie. Millions of people can no longer access their wealth, which is disappearing daily, through mortgage lending. My product shelf has literally been decimated. It’s getting worse too, not better. The end of the mortgage crisis is a long ways off. In fact, we are in the very early stages.

Now you have the mortgage debacle spilling over into the revolving and consumer debt industries. Soon credit lines will be tapped out and delinquencies will reach the levels of the mortgage industry. Then these avenues for accessing credit will shut down too.

The reach of the credit crisis is global. It will negatively impact global economies like it’s affecting ours. With the US in recession, global economies won’t have the US economy to feed their growth. Further, their banking systems and debt markets will suffer in ways that parallel ours. For what it’s worth, as the contagion spreads globally, I see the dollar strengthening.

Today’s measure will do little in avoiding a recession in 2008. The problem is mechanical, not cyclical. The Fed will be ineffective using monetary policy to fix a mechanical economic breakdown . Quarters and half points matter little when there is no delivery system in place (the debt market and banking system) for the “discounted” money.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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The sales pitch goes something like this. “Raise your credit score by fifty to one hundred points immediately”. You may have received the spam or have seen the banner ads. I consider it fraud and Fair Isaac, the creator of the Fico Score, is ending the party.

First off, there is very little that is immediate with credit scores. Everything takes time to filter through. Thats true for on time payments, late payments, credit increases, usage, etc. This “instant gratification element” alone should serve as a warning that something is amiss.

It works like this. The scam artists find people with good credit and credit lines that they are willing to rent. These people are hooked up, for a fee paid by the latter party, with people looking to raise their credit score.

The people looking to raise their score are added to the good credit person’s credit card as an “authorized user”. By adding a credit line that is paid on time and has at least 50% of the credit line available, a credit score can indeed be raised.

With the proliferation of scam artists and fraud, Fair Isaac has decided to change their scoring model to end the scams. In other words, authorized user rentals won’t work any longer.

Authorized user abuse is addressed on the Fair Isaac website as follows:

June 5, 2007 - (Minneapolis, Minnesota, USA) - Fair Isaac Corporation (NYSE:FIC) today announced that it will adjust its FICO scoring formula to ensure the continued reliability and predictive power of FICO scores. This action is intended to protect lenders and FICO scores from abuse of authorized user credit card accounts by a new kind of credit repair service that sells consumer credit card histories to credit applicants in order to purposefully misrepresent the applicants’ own credit history to lenders and other businesses.

The adjustment removes authorized user accounts from consideration by the scoring model in FICO 08, the newest version of the Classic FICO credit score which Fair Isaac expects to become available to lenders starting in September.

Fair Isaac will work closely with lenders to help them implement and benefit from the FICO 08 score as it becomes available.

As a consumer, don’t be taken in by the fraudulent manipulation of authorized user accounts. Save your money and time and take the traditional steps to improving your credit scores.

In light of today’s mortgage meltdown, fraud accusations are being pointed at everyone from the borrower to the credit rating agencies. It would be interesting to know to what extent authorized user manipulation was involved. Knowing their data capabilities, I am sure the credit reporting agencies could easily provide us with this information.

Tags: Current Events, Mortgages, Tips & Tricks by The Mortgage Guy
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You may have heard the commercials “we’re the lender, we write the checks”. Lenders like to make a big deal out of the fact that they are lenders and not brokers. Why? I don’t know, as it makes little or no difference from the borrower’s perspective.

Both can rip you off and both can give you the best interest rate and closing costs. Both can make the financing experience fruitful and pleasant or resemble a root canal. Neither has a distinct advantage in providing a loan for you. How do I know? My company is licensed as both a broker and a lender.

So what are the differences between lenders and brokers?

Technically a broker doesn’t lend the borrower the money. Only a lender can make a loan. They do so through brokers or direct borrower solicitation. A loan never closes in the broker’s name. The broker will not be mentioned on the mortgage note and mortgage or first trust deed. The lender executes those documents. The primary difference between broker and lender is whose name the loan closes in.

This is why brokers cannot issue a commitment letter. They are not lending the money, therefore they cannot commit to making a loan. A broker can however, obtain a commitment letter from a lender and pass it on to the borrower.

The same holds true for interest rate locks. A broker cannot issue a rate lock, not verbally or in writing. The money lent doesn’t belong to the broker, they cannot rate lock someone else’s money. The proper way to handle a rate lock is for the broker to request a rate lock from the wholesale lender and pass it on to the borrower.

Tip:

Broker issued, as opposed to lender issued, commitment letters and rate locks have no value at all. If you ever receive a commitment letter or interest rate lock issued by a mortgage broker, you probably don,t want to do business with that company.

The company is breaking the law. Consider reporting them to the appropriate regulatory bodies. In Connecticut, that would the Banking Department. A report can also be filed on the federal level by contacting the Department of Housing and Urban Development, HUD.

I cannot tell you how many times clients, potential clients and wholesale reps have told me about brokers issuing commitment letters and/or rate locks. As a consumer, you want both in writing. You have nothing unless it is in writing.

Underwriting the Loan

When it comes to underwriting (validating the borrower’s loan file) there are no discernible differences between mortgage broker and lender. If we are brokering a loan we underwrite according to the lender’s guidelines. If we close the loan in our name and act as a lender, the same guidelines apply. Even the largest of lenders have to answer to underwriting guidelines. The only difference is who dictates the guidelines.

The lender makes the rules for the broker and the investors make the rules for the lender. Lenders can sell loans to other lenders for subsequent resale or they can sell the loans directly to investors, either one at a time or in “bulk”. Brokers only “sell” their loans to lenders and one at a time. The consumer gains no advantage dealing with a broker or a lender in the context of underwriting the loan.

Loan Pricing

Whether a loan is brokered or a loan is made, the product is the same as is the pricing (interest rate). Selling loans in bulk can garner a pricing advantage for the lender but that advantage is rarely passed on to the borrower. The consumer doesn’t gain a pricing advantage dealing with either entity.

Consumer Disclosure

Disclosure requirements differ among lender and broker. Lenders are required to make certain written disclosures to borrowers that brokers are not required to make. The same is true for brokers. Again, from the consumer’s perspective, there is no advantage here for the broker or lender. The borrower will still sign a bunch of forms and be afforded certain consumer protections.

Yield Spread Premium

There is a distinct difference in disclosure requirements when it comes to yield spread premium. Yield spread premium is much like selling a bond at a premium. Both mortgages and bonds generate revenue by being sold at a rate higher than the “going” or par rate at the time of the sale. This is how no point loans and no cost loans are offered.

Instead of requiring the borrower to pay points for loan at a given interest rate, for accepting a higher interest rate, the borrower can have the fees covered by yield spread premium. Brokers must disclose this premium to the borrower. Lenders do not have to disclose their premium to the borrower.

I bring this up because there has been a lot press about yield spread premium. Certain politicians who are attempting to demonize brokers and the lending industry, are labeling this premium as a kick-back. Nothing can be further from the truth. Premium is a natural occurrence in the debt markets. If it’s a kick back to brokers, it’s a kick back for lenders and investors as well.

However, it’s not a kick-back.

kick-back: noun

1. a percentage of income given to a person in a position of power or influence as payment for having made the income possible: usually considered improper or unethical.
2. a rebate, usually given secretively by a seller to a buyer or to one who influenced the buyer.
3. the practice of an employer or a person in a supervisory position of taking back a portion of the wages due workers.

from dictionary dot com.

It’s capital gain on the instrument being sold, a profit if you will. Premium is an integral part of pricing debt obligations. Furthermore, in the case of the broker, it is fully disclosed on the settlement statement. A kick back is done without the knowledge of the consumer.

As with the other aspects of securing a mortage, there is no advantage going to the broker or lender.

Summary

In obtaining a mortgage, there is little or no difference working with a broker or lender considering the mechanics of the transaction, loan underwriting, pricing, product design, regulatory protections and yield spread premium.

Both can be upstanding and competent entities to work with or inept ripoffs. From the borrower’s point of view, what else is there? There is no consumer advantage to working with either a lender or a broker. Keep the focus on choosing the right product at a good price from people with a track record of competency and trustworthiness.

Tags: Mortgages, Tips & Tricks by The Mortgage Guy
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Some are handicapping the odds of recession at sixty five percent. Today consumer sentiment came in at a fifteen year low. The highly suspect and often revised jobs creation number came in at 94,000 jobs created in November, while the outlook was for 84,000.

Many have already determined that the Bush/Paulson mortgage bailout will do more harm than good. We are facing massive amounts of foreclosures next year and the year after that. The Fed is expected to ease rates next week. The only question is by how much.

So looking at all of this, it’s apparent that things aren’t going so well for the economy, which usually bodes well for bond yields. Well due to an extra ten thousand jobs being created, the ten year treasury bond added twelve basis points (.12%) to it’s yield. The ten year treasury sits at 4.12% as I write this. Go figure.

I expect a modest downward trend in treasury rates. I expect mortgage rates to follow suit. However we can be surprised with weakness in the U.S. dollar, which could cause rates to rise. Additionally, lenders might tighten up even more on lending, which could widen the spread among treasuries and mortgages. If the spread widens, you could see treasury yields go down while mortgage rates remain level or go up.

The bottom line is we should see decent rates but don’t get greedy because there are influences at work that can sabotage this scenario. If it makes sense and it’s a good rate, grab it. Pigs get fed and hogs get slaughtered.

Tags: Finance & Economy, Mortgages by The Mortgage Guy
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If it makes for good press, you can bet your last dollar that politicians will jump on the band wagon. This is so even if what makes good press, is a disaster in disguise. Saving people’s homes from foreclosure is good press.

Having said this, does it come as a surprise that Hillary Clinton is joining the chorus for a socialistic mortgage bailout? If it does, it shouldn’t. The following is a 4 minute video of Clinton’s speech to Wall Street, brought to you by Marketwatch.

Hillary Clinton’s Financial Ineptitude Documented

Some of her statements are correct. For example, Wall Street’s role in the mortgage meltdown and that it will impact the broader economy. However, she goes downhill fast after that.

Here is where she is dead wrong with her most dangerous statements listed first.

• Her threat to introduce legislation to disallow mortgage backed securities investors from suing. This will undoubtedly destroy mortgage securitization which is the backbone of the industry. Who will buy mortgage securities knowing that the government can change financial contracts on a whim and without the investors having any legal recourse? Is this even Constitutional?
• The ninety day moratorium on foreclosures is nearly as dangerous. Perverting the foreclosure process will also prevent investors from buying mortgage paper. Further, by the their own admission, the bailout will only affect a very limited number homeowners. Yet she suggests a moratorium on ALL foreclosures.
• What is to stop other homeowners from suing for better rates on their mortgages? It is discriminatory to freeze or lower some payments and not the payments of all homeowners. Who decides who gets what and under what circumstances?
• She claims rate resets are responsible for the meltdown, yet it’s been pointed out that at least half of those in default today, are doing so on their initial low teaser rates. It’s also been pointed out that falling values play a significant role in the increase in defaults. When homeowners realize that they are massively upside down in value, they often choose to default on their loans.
• Her assertion that mortgage brokers have a significant role in the mortgage meltdown is also a flawed position as I point out in this previous post.

The video is proof that Hillary Clinton, like George Bush, Henry Paulson, Barney Frank and Chuck Schumer, et al, are severely ill equipped to correct the mortgage and real estate meltdown. This becomes more evident each and every time these people open their mouths.

They are simply politicizing the issue without providing real solutions. Remember, their number one goal in life isn’t to help American homeowners, but to get elected and maintain or increase their power.

The freeze will only make the problem worse. Don’t drink the kool aid and prepare for some very rough times ahead. Times made even rougher with do nothing, feel good and very damaging initiatives.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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It’s about time the powers that be recognize who is really to blame for the mortgage crisis. Andrew Cuomo, who by the way I am no fan of, is sending out Wall Street subpoenas.

Finally reality is setting in with the realization that a mere middleman in the mortgage process, simply cannot be the primary cause of the mortgage meltdown.

I’ve maintained that real bad guys are the risk management departments and credit ratings agencies. Seems like Cuomo agrees.

Marketwatch provides coverage of this newsworthy event.

The office of New York Attorney General Andrew Cuomo has sent subpoenas to request information from severalWall Street firms, including Merrill Lynch & Co. (MER) , Bear Stearns Cos. (BSC) and Deutsche Bank AG (DB) , The Wall Street Journal reported, citing people familiar with the matter.

Prosecutors in a broader investigation of the mortgage business are looking into how well the banks examined the quality of mortgages before packaging them into products sold to investors, the report said. The probe also focuses on how the debt was pooled into securities, including banks’ arrangements with credit-rating firms, the newspaper reported.

Ratings companies are also under pressure after asset-backed securities that were rated investment grade plunged in value as a result of the turmoil on credit and mortgage markets.

Banks and lenders often package pools of mortgages, create securities from them and sell them to other investors, rather than keeping them on the balance sheet.

A step in the right direction as it shows an understanding of what really happened to the mortgage backed securities market. As you know, without securitization, there is no mortgage industry.

The people charged with fixing the issue should be focusing on fixing the debt markets, like right now. If they do, we have a shot at limiting future economic damage caused by this mortgage and real estate meltdown. I know, I’m asking for too much.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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The mortgage payment/interest rate freeze plan is contrary to the well being of competent homeowners, the rules of nature and our gene pool.

In nature, the strong and intelligent survive and the weak and stupid get pruned from the gene pool. Thus perpetuating a stronger species over time.

In modern America, the strong and intelligent get pushed aside (often times on their very own dime) and the weak are given artificial life support. The strong wither and the weak thrive, perpetuating a much weaker and problem prone species. Evidently, it’s compassionate to destroy the future of the species.

The Common Sense Forecaster did some homework on the proposed freeze plan. Who it helps, who it doesn’t and what are the likely affects of the plan. It’s plain to see that the mortgage payment freeze plan is nothing more than a public relations stunt that will cost billions, delay the inevitable and destroy the mortgage industry.

From CNNMoney:

. . . .U.S. Treasury Secretary Henry Paulson began to address efforts to stave off a foreclosure epidemic by lenders, those who service loans, and investors who hold mortgage debt.

Despite much speculation that Paulson is close to helping coordinate a rescue plan that would broadly freeze levels on adjustable mortgages before they reset to higher rates, Paulson gave few details on how such a plan would work.

He did however say who the plan would help, and it would probably leave out a large number of homeowners stretched by their mortgage payments.

Paulson divided subprime borrowers into four groups. The plan would be most geared toward those who can afford the mortgage now but won’t be able to after the adjustment.

The other three groups are largely left out: Borrowers who can afford an adjustment; those who are already behind on their payments; and those who can refinance into a fixed-rate loan.

According to the Mortgage Bankers Association, 5.12% of outstanding loans were in default in the second quarter, a rate about 17% higher than a year ago.

The plan would also seemingly exclude borrowers who hold option-ARMs that aren’t subprime. These are loans that start with extremely low “teaser” rates before rising dramatically a few years into the loan.

It has also been reported that homes that were bought as investments - as opposed to for the purpose of living in - would be excluded.

More than 50% of the increase in delinquent mortgages are actually investor-related, said Wachovia senior economist Mark Vitner. “It’s hard to conceive how many people are actually going to meet this criteria. There’s nothing at all in there that addresses investors,” said Vitner, who added he doesn’t support an investor bailout.

So by Paulsen’s own admission, the plan will only help a small portion of the homeowners afflicted by the mortgage and real estate meltdown.

Clearly it won’t solve the problem and it’s obvious to me that it will only make it worse by leaving the mortgage backed securities investors holding the bag, so to speak. By putting the screws to the mortgage investor, they are killing the life blood of the mortgage industry.

Paul Krugman of the New York Times writes…

Credit — lending between market players — is to the financial markets what motor oil is to car engines. The ability to raise cash on short notice, which is what people mean when they talk about “liquidity,” is an essential lubricant for the markets, and for the economy as a whole.

But liquidity has been drying up. Some credit markets have effectively closed up shop. Interest rates in other markets — like the London market, in which banks lend to each other — have risen even as interest rates on U.S. government debt, which is still considered safe, have plunged.

“What we are witnessing,” says Bill Gross of the bond manager Pimco, “is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.”

So why is Paulsen and company pushing forth remedies that clearly miss the mark and cause further damage to our already broken mortgage securities market? Especially when the real problem is so severe that if left untreated, we are facing very dire financial times.

More from Krugman… As before, the emphasis is mine.

The freezing up of the financial markets will, if it goes on much longer, lead to a severe reduction in overall lending, causing business investment to go the way of home construction — and that will mean a recession, possibly a nasty one.

Behind the disappearance of liquidity lies a collapse of trust: market players don’t want to lend to each other, because they’re not sure they’ll be repaid.

Paulsen, the politicians like Barney Frank and Chuck Schumer, the mainstream media and even some mortgage industry executives are pushing socialistic initiatives that won’t help the majority affected by the mortgage crisis.

If they are not helping the majority of homeowners or the mortgage industry, which is a vital component to the health of the American economy, why are they doing it?

The only thing politicians and government regulators are committed to is keeping their jobs. Plain and simple. Look at the current state of American politics for verification. To some extent, the same holds true for industry CEO’s.

So instead of studying the problem and putting forth potential solutions that will really fix the issues, they take the easy way out. Easy because it is good press.

It’s great public relations fodder to be able to say “awww, the government is going help people who should have never been able to buy a house in the first place, keep their house”. This at the expense of the American public and the American economic system. Good public relations helps one to keep their jobs, incompetent or not.

Shame on them. They are worse than the mortgage brokers that they so fondly vilify.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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The political, business and media elite will have you believe that the current historic mortgage default rate is due to adjustable rate mortgage payment/interest rate resets.

Consequently all three entities are pushing for socialistic remedies. These so called remedies will only worsen the problem by obliterating what is left of the mortgage industry.

Iamfacingforeclosure dot com posts a very interesting article that points out current mortgage defaults are not solely due to ARM resets. Not yet anyway… The emphasis is mine.

The national foreclosure rate has climbed steadily throughout 2007. While most reports attribute the bulk of the foreclosures to ARM resets, the reality is that more than half of the borrowers who are defaulting are still in their first year of the loan.

The abysmal failure of Credit Ratings Agencies and risk management departments of financial institutions to properly assess the risk aspects of subprime loans, have allowed for loan underwriting so lax that borrowers are defaulting on the low teaser rate payments. You can just imagine what will happen next year when mortgage payments rise by an average thirty three percent.

Bank of America Securities estimates that rates will reset on $362 billion worth of adjustable rate subprime mortgages in 2008. At the same time, resets will also occur on $152 billion worth of other loans with adjustable rates, such as Alt-A loans and jumbo loans (loans over $417,000).

The article is a good read and I encourage you to check it out.

As with many, if not all important issues facing the country and it’s middle class today, the mainstream media and our politicians cannot be looked to as reliant information sources. Every tid bit of information disseminated by these self serving entitities is slanted with some type of agenda.

Their tactics include lies, half truths and outright omission. Perhaps that is why the general public is totally oblivious to the economic crisis unfolding before our very eyes.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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